Energy Vault Holdings, Inc. Q4 FY2022 Earnings Call

Greetings and welcome to Energy Vault's Fourth Quarter and Full Year 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Laurence Alexander, Chief Marketing Officer for Energy Vault. Thank you. You may begin.

Thank you and good afternoon and welcome to Energy Vault's fourth quarter and fiscal year end 2022 earnings conference call. As a reminder, Energy Vault's earnings release and an updated fourth quarter earnings presentation is available now on our Investor website and we will be referring to the presentation during this call. A replay of this call will be available later today on the Investor Relations page of our website. This call is now being recorded. If you object in any way, please disconnect now. Please note that Energy Vault's earnings release and this call contain forward-looking statements that are subject to risks and uncertainties. These forward-looking statements are only estimates and may differ materially from the actual future events or results due to a variety of factors. We caution everyone to be guided in their analysis of Energy Vault by referring to our 10-K filing for a list of factors that could cause our results to differ from those anticipated in any forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements except as required by law. In addition please note that we'll be presenting and discussing certain non-GAAP information. Please refer to the safe harbor disclaimer and the non-GAAP financial measures presented in our earnings release for more details including a reconciliation to comparable GAAP measures. Joining me on the call today is Robert Piconi, our Chairman and Chief Executive Officer; and Jan Kees van Gaalen, our Chief Financial Officer. At this time, I'd like to turn the call over to Robert Piconi.

Laurence, thank you and thanks to everybody for joining the call today. Just a few weeks ago, we finished our first year as a publicly-listed company, a year that saw us launch in February, while delivering our first $146 million in revenue throughout the year, $100 million of which was achieved in Q4 alone due to strong execution and customer focus by our people in our first start to deployments and project revenue. I was on the floor of the NYSE two weeks ago with Judy Shaw from the New York Stock Exchange who was interviewing me for a year-in review perspective as we had met the year before during the IPO. And it really struck me to step back and look at all that was accomplished. Starting the year having strategic investors like Korea Zinc and Atlas Renewable, step into the IPO with an additional $100 million of investment from the start, to then immediately breaking ground on our first EVx gravity system outside of Shanghai in March 2022 for the highlights of the first quarter. Note that this first 25-megawatt 100-megawatt-hour system once operating this year will be only one of two operating long-duration energy storage systems at this scale that is not a pump hydroelectric facility. And it really just shows you that the energy storage industry is still in its infancy, particularly for longer duration which is in its own early development stages. We're really excited to show the world what we're capable of here as the EVx system comes online this year. Sticking with gravity, we broke ground in Snyder, Texas in September with Enel Green Power with our first US-based EVx system. And we finished the year signing more territory expansions and license royalty agreement territories outside the United States in Europe and the Middle East, all of which set the platform for future builds and subsequent high-margin royalty streams as the longer duration storage markets develop and become more important as renewables become a greater portion of our power generation. Turning to where there is much larger and immediate demand in the short duration energy storage market, our EVx team executed with velocity and quality and development of our energy management system, enabling the signing of about 1.6 gigawatt hours of battery, hybrid, and green hydrogen energy storage projects with multiple regulated utility companies and some of the largest leading independent power players in the world. This is further proof that customers see and value not only our differentiation and unique hardware architectures and software design, but perhaps most importantly they recognize the seasoned operational and prior energy storage project experience of our team trusting us to deliver on very large scale and complex projects as we will be turning over this year. The type of customers that we are working with do not take risks on execution, full-stop. Their jobs are mission-critical providing power and our energy storage needs therefore have to support that. And we are excited this year to turn over our first systems. Our current backlog and awarded contracts now exceeds five gigawatt hours and approximately $2 billion. And I could not be more proud in supporting the team here at Energy Vault. We set some benchmarks in 2022, while executing well with a strong Q4 finish, demonstrating significant market validation via our strategy across short, long and ultra-long-duration storage wins across multiple storage mediums enabled through our software and innovative energy management system. And we look to continue to build upon this momentum in 2023. Let's spend a minute here on Q4. And regarding Q4 we announced our 2022 revenue of approximately $146 million, which is within the midpoint of our pre-announced higher range of revenue with gross margins of approximately 16% reflecting a mix of gravity license revenue from regional expansions in Europe and the Middle East and execution on battery-related projects in the United States. Our adjusted EBITDA of approximately negative $11.4 million was slightly under our prior guidance driven by upticks in investments in employees in Q4 to support the aggressive projects ramping into 2023 as well as some compensation-related expense given the overperformance achieved in Q4 and the year. Jan Kees will be reviewing more financial details of the Q4 performance shortly. Before we get there I do want to talk in some detail about the 2023 forecast which I know many of you are very interested to understand. As we had already announced and pre-announced a stronger-than-expected Q4 revenue, I would like to spend some time talking about that forecast. And before jumping into the specifics and our financial guidance, I first want to outline our framework and philosophical approach as we begin to share more financial details with investors transitioning from a first year in 2022 marked by large contract wins announcements. And deployment starts with top utilities and global independent power providers to now in 2023 where we will be commissioning and turning over our first gravity and battery energy storage systems globally. Let me first talk a little bit about the shape of the year and how we see our progress ramping. As we saw in Q4 with a significant revenue upside achieved through executing ahead of schedule for a 275 megawatt hour California deployment, we continue to expect a level of lumpiness in our results which could result in potential timing shift quarter-to-quarter and really not unusual at all given our stage of executing on our first deployments as a company. Our out-performance in the fourth quarter is expected to result in successive quarterly growth ramps starting low double-digit million revenue to high double-digit revenue into Q2 and getting quickly into triple-digit revenue quarter-over-quarter in the second half of the year. Our second half of 2023 will thus represent our largest quarterly revenues in Q3 and Q4 coincident with our first project turnovers as expected and for contractual commitments to a progressive build to our year based on contracted bookings from 2022. I want to talk a little bit about the macro factors and talk about how those could potentially impact our forecast as well. We are approaching the revenue forecast that we've given and specifically our cash and operating expense management with the level of tightness and conservatism as we prudently plan for: one, continued uncertainty in the macro interest rate inflationary environment and does general financial market volatility; two, the potential for further regional impact of COVID-related pandemic issues and work stoppages; three, general supply chain and labor tightness; and four, the potential for geopolitical and unforeseen escalation that may occur. At the same time and given our strong liquidity and cash position with no debt, we are well-positioned and poised to take advantage of the industry growth tailwinds for energy storage globally. And specific growth in economic accelerators in the US market driven by the passage of the IRA. And we'll talk more about that in just a minute. Third, let's talk about how we're playing to our strengths. Compounding the momentum we're seeing across our business is our portfolio of proprietary and differentiated storage solutions that is unmatched in the market. And our unique ability to address short, long- and ultra-long-duration needs across multiple customer use cases under the same asset management digital platform. The perspectives that we garner from our customers, from their short-term shifting needs given peak demand cycles to fossil fuel asset retirement tied to longer-duration needs and even very specific regional needs for backup and microgrid solutions requiring ultra-long or multi-day storage are all contributing to fortify Energy Vault's role as a true strategic partner, helping our customers manage through this complexity. In fact, we're very proud to have recently had our energy management system selected by one of the largest US public utilities over other current leading platforms which we believe demonstrates our innovation, our advantaged economics and the velocity of our Energy Vault Solutions team. Fourth, I'd like to talk about the IRA which was really a game-changer to our industry and just really refreshing to see the United States lead in this area given the priority on solving the climate change problem. And first to note that we haven't baked any of its expected benefits into our current forecast. In the US market in particular, we uniquely can take direct advantage of the IRA monetizing one the ITC which represents up to 50% CapEx reduction, thanks to our domestic content and project site in energy communities as defined. For our gravity projects in particular given we can be 100% domestic content and for the projects that we initially own for gravity. But in addition the advanced manufacturing credit which is a $45 per kilowatt hour for our hybrid green hydrogen storage solutions that we integrate deliver under EPC contracts. While the general energy storage market is made up of players that are more single-threaded in their technology and selling into broader growth trends, Energy Vault uniquely can capture significant direct benefits on top of the broader market growth for projects we may initially own. And we have optimized our strategy to do just that pending the Treasury guidance that we expected forthcoming, especially with our gravity energy storage portfolio given its optimal positioning enabled through the IRA for the US market. Just to remind, we are not currently including these benefits in our forecast for revenue, cash or margin as we await final guidance from the Treasury Department on the actual mechanics. But we strongly believe the legislation as intended can and will have significant benefits to our company in an outsized way. Fifth, I'd like to dig in a bit more on the unit economics for our business, which is an area that many of you have asked about as we began our project deployments in 2022. And as evidenced in our 2022 project wins, we will continue to generate higher returns than the industry average because we are continuing to focus on large projects with unique needs that we can match with our high-energy storage solutions from a megawatt hour per acre high density and more efficient design for augmentation, as was the case with batteries, no degradation in the storage medium, as is the case for our gravity energy storage solution and for ultra-long-duration in small footprint, as we did with our hybrid green hydrogen solution for PG&E. Generally, this means a move from the mid- to high-single gross margin percentages on our initial projects to mid-teen gross margin percentages across the board on all content and value added that we supply. And in fact our 2023 gross margins will reflect this as our projection reflects of 10% to 15%. This includes allowing customers who wish to do so, or if we strategically decide to contract directly with suppliers to pass through products, such as battery packages and utilize the Energy Vault to deliver our proprietary hardware architecture across the gravity battery and hybrid systems, coupled with our energy management system. Importantly, our business model and approach flexible, to be able to adapt to each specific customer and project, whether customers choose to procure batteries on their own, or not, for example. This may result in lower total revenues for some projects, but importantly in those cases, we will be exclusively focused on the higher-margin opportunity set associated with the project development, which we target in the mid-teen to 20% margin range. While our revenue will be growing in the 2 to 3x range year-over-year, we are holding our operating expense flat off of our annualized Q4 2022 run rate as we exit the year. This will allow us the potential to achieve positive adjusted EBITDA in Q4, 2023, as we exit the year, assuming that we execute within the high end of the revenue range and perhaps, more importantly, allow us subsequently to enter 2024 on pace to achieve positive operating cash flow and adjusted EBITDA for full year 2024 results. Now, back to the specific 2023 guidance that we highlighted in our earnings announcement sent out just 30 minutes ago. We hold all of the factors above to influence our 2023 outlook, but have taken a very conservative baseline approach that we're adopting in how we forecast our business and felt it most prudent to take a very measured approach to 2023, especially given the significant second half revenue ramp that constitutes our range of $325 million to $425 million for the year. At the low end, our updated 2023 revenue forecast of $325 million reflects only contracted revenues, already under execution, with planned CODs within 2023. At the upper end of our range captures the potential associated with projects forecasted to be placed in service later in the year. Some pending gravity and technology portfolio license agreements that are underway, other territory expansions and other potential projects within the short listing or submission phase of our sales funnel. Importantly, we'd emphasize that even at the high end we have adopted a level of conservatism that does not fully capture the various projects and discussions our team is working on. We plan to update this and refine this range throughout the year, as we gain greater visibility on the development and completion of our large-scale projects. Additionally, as I noted earlier, our forecast does not assume any benefits as well from the pending IRA legislation, pending the Treasury guidance. Based upon the revenue forecast above and projects contracted and under development and deployment, we are projecting gross margins in the range of 10% to 15% for 2023. This expected gross margin outcome reflects the blend across our wide-ranging project slate, including gravity, battery and hybrid green hydrogen projects. Further, we believe it evidences our thoughtful approach to managing the returns of our business, as well as our ability to remain nimble and flexible in developing the right solution to our customer's energy storage needs. As mentioned above, we are holding our total operating expense relatively flat to our fourth quarter 2022 annualized run rate, given the growth investments made in 2022. While this might be surprising, given the 2 to 3 times revenue ramp from 2022 to 2023, we believe this will enable more flexibility, as we ramp the year and allow us to continue to invest in the most attractive opportunities that present themselves. Taken together, we're currently forecasting adjusted EBITDA in the range of negative $50 million to $70 million in 2023. Importantly, however, there is a significant amount of leverage within our range as we ramp into the second half of the year, of between negative $15 million to positive $1.1 million, allowing us to potentially be adjusted EBITDA positive as we exit the year if revenue approaches the higher end of the range, and thus entering 2024 with a platform for positive operating cash flow. One thing I want to iterate here at the end of some of the specific guidance is our primary focus for this year, which really hasn't changed on our focus from last year, which is executing to customer needs. This year becomes even more critical in that regard as we will be turning over our first systems to customers and demonstrating, not only our innovation and the development of technology, our innovation and execution capabilities to deliver on time and on budget but delivering a quality technical performance and operating performance for our customers for our initial gravity and battery energy storage systems that will be delivered and turned over this year. I want to talk also a little bit now about EVx and turning to some project-specific progress updates. Let's start in China, which is where we broke ground in March of last year with the first 100 megawatt hour system. And China continues to progress. And this success is leading to more opportunities for us in the Asia market, as you may have seen announced. I'm really proud of the Atlas Renewable and the team from China Tianying, as they worked through two long COVID-related shutdowns in particular in the Shanghai area, which is where Rudong is located approximately 45 minutes outside of Shanghai. We've included in the investor presentation some additional pictures from Rudong. And you can see the extraordinary progress being made in such a short period of time. This is also further validation of EVx's economic and technological viability. In a few short years from 2017 and 2018, when we built the first 5-megawatt system in Switzerland, we have been able to develop the new EVx system in a new form factor leveraging all of what was proven in Switzerland with a 5-megawatt system to an interconnected grid system and to now to be close to be commercially developed in our first 25-megawatt and 100-megawatt hour unit in Rudong China that as I mentioned earlier, will be one of the first systems in the world in long duration at that scale that's not pumped hydro. We continue to be very excited about that and excited also about what we're implementing in that system. Let me give you a little bit of a higher level of context as well as we see the present and future market segments for our EVx and how we are maximizing our opportunities for success. Let's start by segmenting the EVx market into two end-use types. The first segment is the utility grid uses and the second being the industrial and micro-grid uses. The first segment for utility grids continues to be heavily biased in the current time to shorter duration needs and use cases that are currently being served as we are serving them with lithium-ion solutions. As time goes by and renewable power reaches a larger percentage of the overall power pool, the need for long duration will drive broader adoption of solutions like EVx in broader deployments. And to address these market realities for establishing strategic relations early on with these same utilities that we're currently integrating some of the shorter-duration projects where we've gained installed footprint. Our strategy is to expand these relationships in the future to include the EVx as their long-duration storage needs emerge and progress. And in fact most of the utilities we're working with have those needs as they were shutting down some of their existing fossil fuel assets over time and will require longer duration storage solutions at the end of the existing grid. Shifting to the industrial and micro-grid applications, we see a lot of strong interest today that requires durations of eight to 12 hours and use cases accordingly and are not well-suited for existing shorter-duration technologies like lithium-ion. We've talked a lot about our metals and mining investors and operations are great examples as they electrify their operations and this has enabled us to work with our strategic partners such as Korea Zinc and BHP to develop ways to implement the EVx to decarbonize their operations. Other segments, such as green hydrogen that are emerging, as well as the strong demand required to meet the need for sustainable aviation fuel, which is a market that we believe is going to be in the multi-billions in the coming five to ten years. In parallel with how we are addressing these segments, we are also executing three initiatives for us to extract both near-term and longer-term economic benefits from EVx. The first as you might expect is our continued cost reduction programs. With the feedback design and construction of the EVx in Rudong, China, which follows all the learnings from Switzerland on our first grid-interconnected five-megawatt system in our Arbedo-Castione coupled again with the R&D efforts with our team in Switzerland and the United States led by Andrea Pedretti and Chris Wiese we continue to design test and validate the latest innovations to increase the economics of the EVx system. This includes leadership from Dr. José Andrade, who was a former PhD and Head of the seismic studies department at Caltech and joined us over one year ago bringing tremendous expertise and research to help us continue to optimize the performance of that system. I'm also pleased to share with you that we have retained the services of William Baker the renowned engineer of the Burj Khalifa Tower in Dubai, which is the world's largest building at the height of over 2,700 feet. Bill will be applying his past expertise in development of the world's most innovative high-rise structures to our optimization efforts, but also to specific customer opportunities where his presence and expertise will be welcomed and will also help us accelerate the permitting of the existing range of height of our structures and the potential to even accelerate those same heights of those same structures. Within our gravity focus, we have a team that's supported by over 70 team members. And we're excited to see the development they are able to make throughout 2023 and look forward to sharing the details of their progress in the coming quarters. Another initiative associated with our EVx systems, as we previously announced our continued licenses and royalty programs that give us the opportunity for attractive recurring revenue at very high margins that will materially and positively impact our overall company blended margins. In addition to the announced opportunities in China and the follow-on opportunities alone in China of up to six gigawatt hours as have been announced in the last six to eight months, I am pleased to announce today two new EVx licensing partners in CITC based in the UAE for Egypt and also New Energy Keepers based in Greece to also develop the Cyprus market, which were signed in the fourth quarter. We will continue to pursue these types of businesses globally to make EVx a meaningful margin contributor to the bottom line today, while bridging to the future state of broader market adoption of longer-duration systems, as the grid develops with more renewable power generation, and therefore, the need to address the increased intermittency that comes with renewables. The third initiative is leveraging the IRA as another amplifier and accelerator for our EVx business within the United States as we've discussed above. And perhaps globally, as other nations and even regions may follow suit on the leadership the US has provided in developing incentives to accelerate the deployment of renewable energy and renewable storage. While the legislation has not yet been fully defined at a detailed implementation level, we believe that it will come to market more or less in the same form and function as currently understood. We currently believe that both the advanced manufacturing credit and project investment tax credits could significantly and positively impact the economics of the EVx in particular for the coming years. We believe that the local manufacturing construction of EVx would make it suitable to receive advanced manufacturing credits of perhaps as much as $45 a kilowatt hour. An attractive design and draw of the EVx is the ability to locally source material and labor that would enable the system to take advantage of many of the domestic content portions of the ITC as well. You can expect a lot of focus and continued updates in this regard on EVx the U.S. market and development of the IRA in the coming quarters. Just to highlight a few of the commercial activities and progress, as we came out of Q4. We have 1.6 gigawatt hours of signed contracts and booked orders in the backlog. This is a more than 3x increase from the third quarter of 2022, where we exited with 495 megawatt hour. This includes 275 megawatt hour with Wellhead Electric, 220 megawatt hour with Jupiter Power which was acquired by BlackRock Infrastructure in Q4, 440 megawatt hour with Nevada Energy and up to 700 megawatt hour with PG&E in California. Our submitted proposal pipeline grew more than 50% quarter-over-quarter as energy storage demands and needs as we see remain robust and we remain with a seat at the table in making proposals. Our awarded category shifted by approximately 17% for the quarter-over-quarter, driven by positive factors as projects were converted that were sitting in the awarded category into booked orders. As I mentioned before, the primary focus of 2023 will be on project execution. We are currently on track to deliver all of our signed projects on time. And our team is working very hard to navigate the supply chain permitting and interconnection delays that are prevalent in the industry but thus far, have been able to manage through and working both with our customers and with our supply chain partners. Given the rapid pace that we are seeing with the energy transition and all the unique use cases and solutions required to meet our customer needs, we continue to believe our differentiated holistic solutions-based energy storage approach is the best one suited for this market and will set up Energy Vault for a very large and unique future, as a major leading player over the next five to ten years. One last comment on the project we signed with PG&E for hybrid, green hydrogen plus battery storage solution in January really showcases the differing needs of our customers and our ability to deliver on them. In this case, and this is the case in California, they needed a product which could provide a minimum of 48-hour-long duration energy storage to address needs in the event of a power safety shutdown as was evidenced by the wildfires that impacted the utility industry in California some years back. But they also required black-start and grid forming capabilities in the event that there was a public safety shutoff event. And given our technology-agnostic approach with our software we were able to engineer, design, integrate and will in the future operate the system with our proprietary software that will actually enable up to 700 megawatt hour or almost four days of long-duration energy storage. We're very excited to bring and demonstrate and showcase our broad technology expertise to be able to design and architect this solution with our partners and to progress on this project to completion, planned in the second quarter of 2024 and to continue an even broaden this partnership with PG&E, and the city of Calistoga. With that, I'd like to turn the call over, to our CFO Jan Kees van Gaalen, who can provide more details into our financial results from Q4.

Thanks, Rob. In the fourth quarter of 2022, our revenue reached $100.3 million, driven primarily by $84.5 million from our battery storage projects and $15.6 million from licensing deals with EVx. Construction of the Wellhead project started in Q4, and we began recognizing revenue for it during this period. The revenue from Wellhead bolstered our battery storage project revenues this quarter. The licensing revenue was notably comprised of $9.7 million from our deal in Egypt and $5.9 million from the Atlas deal. For the entire year of 2022, we generated revenue of $145.9 million, mainly from $85.6 million earned from battery storage projects and $58.5 million from EVx licensing deals. In Q4 2022, our gross profit stood at $15.9 million, mainly due to licensing revenue, bringing the full year's gross profit to $59.3 million. Excluding the cost of sales, total operating expenses in Q4 were $41.7 million, an increase of $5.4 million compared to Q3's $36.3 million. Stock-based compensation in Q4 was $14.3 million, which is $3.4 million higher than Q3 2022. Depreciation expenses for Q4 were $0.2 million, down from $5.2 million in Q3. Excluding these non-cash charges, our operating expenses increased by $7 million from Q3, largely due to a rise in headcount. Overall, total operating expenses for 2022 amounted to $122.4 million, or $81.3 million when excluding stock-based compensation. Sales and marketing costs for Q4 were $4.3 million, compared to $3.8 million in Q3. Excluding stock-based compensation, sales and marketing expenses rose by $0.6 million sequentially. Our total sales and marketing costs for 2022 were $12.6 million, with $6.7 million of that increase year-over-year mainly due to higher headcount and increased marketing and public relations expenditures. Looking at research and development costs, they were $13.9 million in Q4, down from $16.7 million in Q3. Excluding stock-based compensation and depreciation, R&D expenses increased by $2.7 million compared to Q3, driven by more R&D activities, especially STIP, which accounted for $1.9 million. Total R&D expenses for 2022 amounted to $50.1 million, excluding stock-based compensation and depreciation, reflecting a $20.3 million increase from 2021 due to heightened R&D activities. General and administrative expenses rose to $23.5 million in Q4 from $13 million in Q3, with an increase of $6.6 million primarily due to headcount, of which STIP accounted for $3.5 million. Year-over-year, G&A expenses rose from $18.1 million in 2021 to $56.9 million in 2022. We will maintain focus on our operating expenses as we selectively expand globally and position the company for long-term growth. The operating loss for Q4 was $25.7 million, an improvement from the $36 million loss in the previous quarter, resulting in a total operating loss of $63.1 million for the year. Our adjusted EBITDA for Q4 was a negative $11.2 million, leading to a total adjusted EBITDA of negative $11.4 million for 2022. Our earnings release includes a detailed reconciliation from net income to adjusted EBITDA, highlighting non-cash items added back, such as $41.1 million in stock-based compensation and $20.6 million in merger transaction costs, among others. As of December 31, 2022, we held approximately $286.2 million in cash and equivalents, positioning us well for our growth objectives for 2023 and beyond. We also have $5.1 million in outstanding private warrants, requiring remeasurement to fair value each period. For 2023, we project revenue guidance between $325 million and $425 million, reflecting strong growth year-over-year. However, we are adopting a more conservative stance regarding our financial expectations for this year, factoring in the variability associated with our large-scale projects and the anticipated timing of our financial results. We remain focused on steady growth in our infrastructure and capabilities, which will benefit our business and our customers. We are targeting adjusted EBITDA in the range of negative $50 million to negative $70 million, driven by revenue mix changes as we move beyond the margin benefits of earlier licensing and royalty agreements while continuing to expand our infrastructure and key resources for project delivery. I will now turn the call back over to Rob.

Thank you, Jan Kees. And I would like to also welcome and thank Jan Kees for his first quarter under his belt here at Energy Vault. And he's a great addition to our team. And as we're looking at the business, given the growth, we're going to be taking on his global experience let alone his length of tenure across multiple public companies across the world is going to serve us very well. Look here, we're at the end of the call. A few things I want to reiterate here before we turn it over for questions and a few data points I'll point to. We really tried at this point as we're digging into the forecast for this year to begin to share more information as we now have more visibility with executed contracts and booked orders. And a few data points I want to highlight and reiterate with you. One is on the funnel metrics. We shifted to a more near-term 12-month funnel approach and segmented it in four sections. There is a page within our investor deck that's on the website that summarizes that funnel. I want to point you to a 50% increase in the number of proposal submissions that we've made from 13 gigawatt hour last quarter, now up to 20 gigawatt hour, which is a massive number. I think it's a great leading indicator of what's to come. Not suggesting we're going to be batting 1,000 on those or win all of them. But you can count on the fact that we're going to win some of them. And I think that's a great leading indicator on that front end of that funnel as we move from those submitted proposals to shortlist to project awards and then into bookings. And we've, I think, demonstrated an ability to move that forward with velocity. The other thing I want to highlight, as Jan Kees mentioned right at the end of his review of the results, is liquidity. I think we're in just a fantastic position with no debt on the balance sheet and finishing with actually growing cash quarter-over-quarter is just a fantastic data point and puts us in a great position to now, as we evolve the business, entertain and have discussions as we are to get surety and bonding capacity, for example, for these larger projects and with non-collateralized solutions. So really avoiding letters of credit that require us to restrict cash, but we're working in a very positive way with Marsh which is one of the largest players in the United States, and bringing solutions together for non-collateralized bonding capacity, as well as non-collateralized letters of credit. And that's going to serve us well as we will not restrict cash on our balance sheet. The other thing that, I want to highlight and emphasize is for the first time we shared information about our gross margins and unit economics, but also spent some time about our philosophical approach to how we contract our deals and the blend of our portfolio as well as the mix across customers that we work with where they want us to integrate 100% through our books, of all the third-party equipment and others where we choose not to and focus on the integration component. We're very sensitive about that because we want the highest returns on the work we're doing. It demonstrates value. We should be generating high returns on what we're doing that shows we are differentiated. And in some cases can command a price and even a premium because of the nature of that differentiation. So it's a very important strategic area for us. It is an incentive for the entire company. So gross margin performance is one of the key incentives this year tied to compensation of our executive team and all of the employees in the company. I also want to highlight here at the end that, hopefully, you can appreciate a much more conservative nature a bit and as we look at our forecast for 2023. And this is just a function of one the world we live in as 2022 demonstrated as the last few years. We joke with the team a bit that as we sit here today, we know that as we sit here a year from now we're going to look back and see that the year went completely different than we thought. Obviously, certain things we know will go as we expect them to in terms of delivery to our customers of projects underway. But in terms of what we're going to book this year the new things that pop into our funnel that, we don't see today maybe some things would fall out. We're very excited about that and we'll continue to capitalize what we believe is a very differentiated solution. However, we have taken an approach and have attempted to share with a lot of you on this call, being sensitive to factors that are a part also of our current growth phase of the company. We're turning over first projects. We're going to be starting more projects the second half of the year. This is the first year we're turning over projects and systems. And so there are certain things we outlined that, I encourage you to think about, and hopefully appreciate as that's reflected in the current forecast we've given. We feel very, very good about the low end of that forecast, because it's made up of what's already contracted and booked. And we feel very good about where we are in that execution. And thus we feel very good about executing toward the higher end of that forecast. And as we mentioned, there are certain things that are not included in that forecast, like the potential benefits, which we believe will be positive of the IRA legislation. Finally, I just want to always thank the employees of this company where our days begin and end every day. I cannot be more humbled and excited about continuing to support this team. We do not limit our thinking, because of the talent that we attract to this company, which is why in Q4 you saw us continue to add at a little greater rate to set ourselves up well for good execution here in 2023, to deliver on our goals. And we will continue to make strategic adjustments and strategic additions to the team as we evolve the company. With that, operator, we are now ready for questions.

Thank you. We will now begin the question-and-answer session. Our first question comes from Thomas Boyes with TD Cowen. Please go ahead.

Thanks so much for taking my questions. Great to see the progress, especially, on the gravity storage front with the additional licensing agreements. I just wonder if you could dig a little bit deeper there on just how they're structured? Is this going to be similar to the agreement that you used in China? I think I remember a $15 million licensing payment that was associated with that agreement. Could you just kind of walk us through some of the mechanisms there? That would be great.

The structure of those agreements varies based on several factors, including exclusivity. Some agreements may last from as short as 7.5 years to over 10 years. They differ in duration, terms like exclusivity, and payment structures. However, a common element is a license fee that is primarily associated with the right to deploy the technology, rather than tied to deployment volumes. This license typically includes exclusivity for specific regions, which requires volume commitments to maintain that exclusivity, regardless of the license fee. Following the initiation of deployments in those areas, a royalty stream begins. We have previously disclosed that the royalty percentage in our initial deal was 5% of total project revenue from volume deployments. For these new agreements, you can expect similar figures.

Perfect. That's very helpful. And then maybe just as my second question, it sounds like obviously to a certain degree you're still going to be procuring battery storage hardware for some of your customers. Can you talk about the sourcing strategy there, or how far are you looking to contract supply? Are you contracted throughout for 2023 for projects that you are being required to deliver on now, or are you even looking further out?

We have various strategies for working with our customers on battery deployments. Our goal is to innovate and differentiate in areas such as deployment, integration, software performance, and the economic advantages for our customers. This commitment to innovation is foundational. For instance, our initial contracts were won not because we offered the lowest price, but because we reached an energy density unmatched by competitors, as seen in the Wellhead deal in Stanton, which required over 68 megawatts while existing solutions only provided up to 50 megawatts over a four-hour timeframe. Another case is with PG&E, where we created a renewable solution for energy storage that conventional natural gas methods couldn't address. By integrating batteries with green hydrogen, we developed an effective renewable strategy. From a sourcing perspective, we focus on innovating our hardware architecture and unique designs for optimization regarding energy density, performance, and safety. Our architectures allow continued system performance even during module shutdowns, unlike many battery systems that fail entirely during safety issues. This level of differentiation affects our sourcing. Led by Akshay Ladwa, based on the East Coast with our Energy Vault Solutions team, we engage closely with battery suppliers, qualifying both established and emerging ones to enhance differentiation in our battery cell development, hardware, and software design. Our strategy may involve collaborations with smaller suppliers that aren't among the largest in the market, aiming to differentiate our solutions. In some cases, we work with customers who have established relationships with major battery suppliers that dictate their choice. In these situations, we may serve as an integrator, collaborating directly with their selected supplier or having the customer procure directly from that supplier, which shifts the working capital and risk to the customer for delivery and any related issues. It's crucial to note that we are not passively waiting for domestic battery production to ramp up in the United States. We are actively evaluating players looking to establish themselves here and aim to participate in developing that value chain. We recognize the potential value of sustainable differentiation in terms of availability and pricing, especially as the domestic supply chain develops due to incentives from the IRA. We plan to share some updates on these efforts publicly soon. Currently, 95% of the energy storage being deployed involves shorter-duration lithium-ion batteries, which remains a key point.

Excellent. No, I really appreciate the insight. I'll drop back in queue. If I could just sneak one more in. Just for the domestic sourcing that you're talking to for lithium-ion batteries. Do you have a sense on when that type of capacity would be coming online? Is that a 2025 event do you think, or could that happen quicker?

We're seeing some coming online as early as the second half of 2024, but in real volumes 2025-plus. So that's from our work in the sector and working with players that are looking to build roughly what we see.

Thank you. We take the next question from the line of Joseph Osha with Guggenheim Partners. Please go ahead.

Hi. Thank you for taking my question. Two questions. First, I greatly appreciate the detail in terms of the composition of revenue in the fourth quarter. Looking into 2023, it kind of broadly seems like there are three buckets. You've got your BESS revenue. You've got anything that might potentially come from delivery of EVx systems and then EVx licensing. I'm just wondering if you can help us understand how 2023 revenue might fall into those buckets, assuming that I'm thinking of it correctly.

Sure. I believe you have a good understanding of the revenue categories. There's also a fourth category I can mention. As we've stated, we have three significant, shorter-term projects scheduled for completion in 2023, which will contribute considerably to our battery revenue. Some of these projects involve hybrid systems, including lithium-ion batteries. Regarding EVx and EVx licensing, we plan to continue developing particularly in international markets, but we don't anticipate this growth happening in the U.S. This is because EVx primarily relies on fixed-frame lifting systems and power electronics that must be executed by local suppliers and engineering procurement and construction companies. Thus, the licensing model is quite appealing, allowing us to provide local suppliers with flexibility without needing to invest heavily in local infrastructure. These local suppliers are typically more knowledgeable due to the nature of the construction, which is largely localized. This approach supports domestic jobs and content, aligning with many countries' goals for energy independence, especially as they explore renewable sources and energy storage. We are seeing considerable interest in this model, which benefits both parties and paves the way for future high-margin royalty streams as projects are deployed. We expect that a portion of our revenue will come from this approach, although it won't be a significant amount—not in the triple-digit million range, but there's always potential for larger deals, like we saw with Atlas Renewables. It's likely to be a revenue stream in the double-digit million range for 2023. About EVx, our initial deployments will likely occur through royalty license agreements, similar to what Atlas is doing, or through projects we will own, particularly in the U.S. market. We see significant potential there due to the incentives from the IRA related to gravity since it involves lithium, and we believe the IRA will enhance the financial viability of these projects. Our ability to advance these projects, find interconnection points, and monetize EVx efficiently will be quite promising as the demand for long-duration solutions increases. However, for 2023, the licensing aspect and our ownership of systems will mean that revenue recognition will occur later due to our arrangements, like a tolling agreement after construction, so there won’t be immediate revenue impact in the U.S. this year. Regarding the systems we've announced, such as the project with Pacific Gas & Electric or unique hybrid systems, these projects will be developed and constructed. We may transition some of them to an EPC agreement where we take on the construction. Regardless, we intend to serve as the asset manager, which is an interesting role for us. I plan to arrange another call to discuss our strategy in asset management further. This is an area of growth where we see significant potential as we operate on behalf of large independent power producers or infrastructure funds. That should give you some insight into what we've already announced and what we’ll be developing throughout the year.

Okay. Thank you. And just a quick much shorter follow-up on the IRA. One thing that we've heard some BESS system integrators talk about is the idea of not making cells on store necessarily but potentially doing pack assembly right? And there is a manufacturing tax credit associated with that. Any thoughts on whether we might see Energy Vault involved in battery pack manufacturing in the US?

Okay. Sorry, your question is specifically about assembling integration in the United States versus actual manufacturing?

Well, there’s no pack manufacturing because there’s a cell credit and then there’s a module credit. We’ve seen one of your competitors, for example, discuss sourcing cells while actually doing module assembly in the US, which comes with an associated credit.

Okay. Sorry about that. Yes, I understand the question. So the answer is yes, in terms of our involvement. And we had announced as an example with Jupiter Power, an agreement to work with them was 2.4 gigawatt hour of sourcing that we announced to work with them on around domestic content that will be up to, and including looking at leveraging the energy communities' aspect, but as well as sourcing whether that be in the direct manufacturing area or in the packaging and integration area.

Thank you. We'll take the next question from the line of Chris Ellinghaus with Siebert Williams Shank. Please go ahead.

Hey, everybody. How are you? Rob can you talk about the change in the two-year revenue guidance and sort of how you have made that more conservative in terms of your view of revenue recognition for this year?

Sure. There were three main factors that I highlighted in the announcement. The first factor was our acceleration from what we initially planned for Q1 this year, which contributed additional revenue to Q4 due to faster execution. The second factor, which primarily impacted our revenue, involves a large customer project of about a gigawatt hour. Initially, we intended to integrate the entire project through our balance sheet, directly contracting for components like the battery packages. However, we chose to allow the customer to contract directly for that part of the equipment while we remain the integrator for the overall solution and other balance of plant aspects. This is still a significant deal for us, but as you may know, the battery modules usually constitute 55% to 70% of such deals. Excluding this portion will reduce our revenue, but interestingly, it allows for mid- to high-teens gross margins, which we are pleased with. I've mentioned our battery sourcing strategy before, where we focus on differentiation and optimization, leading to lower costs and typically higher margins for integrated solutions that we control entirely. We have some customers with established relationships with major battery suppliers where our value addition is limited, mainly providing integrated support. The second area affecting two-year revenue guidance relates to this choice to emphasize our integrated capabilities versus the battery aspect. The third factor involves a significant ramp-up in the second half of the year, as we plan to turn over nearly a gigawatt hour of systems, with two projects planned for Q3 and a larger one in Q4. Consequently, we have triple-digit million revenue anticipated for Q4. Given that part of our revenue is heavily weighted in the fourth quarter, we took a more conservative approach. If any revenue were to shift from Q4 to Q1, we want to ensure we are prepared, though we haven't lost any revenue; it just means something might shift a quarter. We aimed to provide visibility and transparency regarding this revenue, making us feel quite comfortable with the lower to mid-part of our range. We're confident in our execution ability as we demonstrated last year. For instance, we contracted deals in July and August last year, with one deal generating over $80 million in revenue for Q4 within four months of signing. While I cannot guarantee we will achieve this timeline consistently, I wanted to share this detail to indicate that despite our conservative approach, particularly given the second half ramp, we believe we can execute closer to the mid to upper part of our guidance range. With the IRA and our prior achievement of nearly $150 million in revenue along with booked deals and total awards, we are optimistic about our prospects for the year.

Okay. That helps a lot. Thanks, Robert.

Thank you. We'll take the next question from the line of Brian Dobson with Chardan Capital Markets. Please, go ahead.

Thank you very much. Thanks for taking my question. So just returning to the guidance issue for 2023. As you're thinking about it, would you say it's fair to characterize, call it, the bottom half of your guidance as a conservative approach in that, there is a potential for revenue slip into 2024 and that you're fairly confident as things stand right now that you could be at the mid to high end?

Yes, I would say that's approximately correct. We have taken a cautious approach starting with the lower end of our bookings, and we are executing accordingly, remaining on track to deliver. We feel confident about what we have secured so far. As we consider the middle and upper parts of our forecast range, we have solid strategies in place to achieve those targets, excluding the IRA situation. I understand that this may come across as lower than expectations, especially with projections of up to $500 million this year, based on our previous two-year outlook. There's one deal where we are focusing on a smaller part of the content but with a higher gross margin, which I believe is significant. Overall, I think your assessment of the lower end of the range is accurate, and we feel quite optimistic about where we started. I also have strong confidence in reaching the mid to upper part of the range as the year progresses. With each quarter, we will gain more insights as we see additional bookings and execute our plans, which might reveal opportunities we hadn't anticipated that could contribute to revenue recognition within the year. Our intention with this forecast is to tighten the range every quarter and expand it strategically. Ideally, due to our conservative approach, we should be able to refine it toward the mid to higher end of the range with each subsequent quarter. That was the goal behind how we structured the forecast. As we move into the second half of the year, we aim for strong execution toward the higher end. If the IRA developments proceed as we hope, I believe we will have a very successful year.

Right. Understood. And I understand your desire not to include IRA benefits in the guidance range. But do you think you could potentially perhaps draw a range around what that could potentially look like?

Yeah. I would say we have two projects in particular that could garner some benefits and even in the year depending on the way the treasury mechanics come out. So I would say there are some benefits that are definitely in the double-digit millions of benefit. Now how much could we get in the year versus would go into 2024? That's another question. There are ways to monetize those benefits earlier. So I would say, if I had to tell you today and assuming the IRA come through there may be more cash related benefits this year versus revenue recognition benefit, okay. Those revenue recognition benefits may come next year. But given I think some of the alternative structures we're going to look at and taking advantage of it, we may very well see a good strong double-digit million type of cash benefit potentially this year that we wouldn't have in our forecast. And of course, we like that. We like the cash flexibility. And we as I said we're trying to be now as we have more information and data be more transparent and share with the market so people would understand that we're very happy to take the cash even if the revenue recognition may come later. So those benefits anything that gets in the double-digit million is significant. I think whether that's cash or even potential rev rec. I have to start with the US because, due to the IRA, there has been a significant focus here. This presents a lot of potential, especially since it is one of the largest storage markets. Australia is also shaping up to be an important market for us, particularly because of some of our investors with major operations there. The green hydrogen market, which relies heavily on electrolysis and running electrolyzers for long-duration storage, will be crucial for Australia. Moving to Europe, Scotland is making significant strides with its offshore wind investments, presenting numerous opportunities for us. Additionally, I cannot overlook the Middle East. We have recently announced a partnership with a license partner and are strategically exploring large opportunities in that region. In the Middle East, projects tend to be large in scale, and we have Saudi Aramco Energy Ventures in our network, which we consider an interesting relationship. We have also made some recent developments in this area. Furthermore, we are excited about regions like India, where we continue to develop projects, including a Memorandum of Understanding with NTPC, the largest public utility and power entity there. We are exploring alternatives for using coal ash and waste materials with our EVx initiative. We are looking at ways to deploy quickly and potentially initiate projects this year. I would also mention our existing customers. Assuming we maintain effective execution, we are in discussions with them regarding follow-on projects based on our performance. It’s important to uphold our execution standards, as continued success will improve our prospects for new deals. For example, with Jupiter, we have announced two projects—the largest in ERCOT, one in California and one in Texas. Additionally, we have engaged them in a sourcing collaboration involving 2.4 gigawatt hours of batteries. Jupiter, which was acquired by BlackRock’s infrastructure group in Q4, presents us with ample capital opportunities. We anticipate that our existing customers, where we execute well, will lead to ongoing discussions that will provide us with further growth potential.

We'll take your next question from the line of Brian Lee with Goldman Sachs. Please go ahead.

Hey, guys. Thanks for squeezing me in. In the interest of time maybe just one question from my end. Can you guys give us a sense of the margin differential between EVx and EVS? And are you currently profitable on EVS, or if not, what's sort of the path forward to become profitable on selling EVS? Thanks.

We don't sell EVS, so let me clarify some things. The Energy Vault Solution is actually a group rather than a single product. To address your question, I believe you're asking if there are any unprofitable aspects between EVS or specifically. When you mention EVS, it likely relates to some battery deployments that have been led by software. Just to be clear, everything we're doing is profitable on a unit economic basis. If it weren't, we wouldn't be discussing gross margins of 10% to 50%. There's not one project we've undertaken with a negative gross margin. With the visibility we have now, we forecast a gross margin range of 10% to 15%. Given our conservative nature in assessing our 2023 forecast, we have solid unit economics across the board. The percentage gross margin will vary depending on factors such as whether we are processing batteries through our balance sheet at a mid-single digit margin or not. If we’re not, we are definitely in the mid to high-teens with just our own solutions. This applies to today, especially when looking at EVx, for example, in relation to where we plan to deploy that project initially. Before optimizing or reaching higher volumes, we are testing various new cost reduction methods in our system in China with EVx, which will benefit all future systems. The 10% to 15% range is a good figure for your modeling, Brian. Lastly, it's essential to note that the use case drives profitability. For instance, take PG&E; they initially thought they could only opt for natural gas in their RFP for a multi-day project. We proactively proposed a unique architecture integrating lithium-ion and green hydrogen due to our expertise in these areas, thanks to recent engineering hires in our team. Since we can uniquely provide this solution, our pricing expectations and therefore margins are appropriately set. Given that it involves a public utility, we need to deliver a certain value aligned with their budget expectations. Solutions where we offer unique hybrid options, like in this case, will contribute positively to our profit stream. Is that helpful?

Yes. No, appreciate all the additional color, Rob. Thank you.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. And I'd now like to turn the call back over to Robert Piconi for closing remarks. Over to you, sir.

Okay. Look, thanks everyone who joined the call today, and we'll look forward to further updates going forward. Thank you very much.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.